Top stock picks from seasoned investors for these dangerous market times

A number of observers are warning that the nine-year-old bull market will soon sputter amid higher interest rates, stretched valuations and escalating global trade tensions.

But if hiding in cash seems like an extreme response to an uncertain threat, what are the best Canadian stocks for awaiting a downturn that, well, might take a while?

Admittedly, the stock market looks good on the surface: Corporate profits are rising and unemployment is low. Even though central bankers are raising interest rates, they are moving gradually and only in response to solid economic growth.

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But the cumulative effect of monetary tightening − the Bank of Canada raised its key rate by a quarter of a percentage point on Wednesday for its fourth hike in 12 months − will eventually be felt.

Capital Economics expects the U.S. economic boom will turn into a bust as soon as next year. And David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates, believes investors are shrugging off the threat of a flattening yield curve and various indicators that point to a late business cycle.

“Everyone seems to just live in the moment,” Mr. Rosenberg said in a note earlier this week. “This is the most dangerous thing to do right now from an investment standpoint.”

If you share his concern and recognize that market timing – jumping in and out of cash – is nearly impossible to get right, there are compelling investments that can serve you well no matter when the bull market finally dies.

The best bet, according to the seasoned investors we contacted, is to look at high-yielding stocks that are out of favour and whose underlying businesses will continue to thrive during an economic downturn. Since interest rates will decline with a downturn, those big yields will look very attractive.

The best part: Most of these stocks are cheap.

Stephen Takacsy, chief investment officer and lead portfolio manager at Montreal-based Lester Asset Management, pointed to four relatively small Canadian stocks that fit the bill – three of them former income trusts and all of them able to withstand economic setbacks.

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“The valuations are extremely reasonable compared to most of the market, which is very expensive,” Mr. Takacsy said.

Rogers Sugar Inc. added maple syrup to its mix of sugar products with last year’s purchase of L.B. Maple Treat Corp. The acquisition is taking longer than expected to absorb and the share price has fallen 15 per cent this year. But the dividend yield is 6.7 per cent and analysts expect profit will rise to 46 cents a share in its fiscal 2018, up from 27 cents last year.

Sienna Senior Living Inc. operates long-term care facilities, including retirement homes. It hasn’t raised its monthly payout in more than five years, which has made the stock particularly sensitive to rising bond yields. The share price has slumped 12 per cent this year, pushing the dividend yield up to 5.6 per cent. But this is a stable business that taps into aging demographics, and revenues and profits are on the rise.

Ten Peaks Coffee Co. Inc., formerly Swiss Water Decaffeinated Coffee Income Fund, uses a chemical-free decaffeinating process. Say what you want about coffee with no kick, but between 2011 and 2017, per capita consumption rose 60 per cent in the United States, according to the U.S. National Coffee Association. The shares yield 4.1 per cent and are down 9 per cent this year.

K-Bro Linen operates laundry facilities for health-care and hospitality sectors. The shares have tumbled 30 per cent over the past three years amid expensive efforts to modernize its facilities. But all six analysts covering the stock now recommend it as a “buy,” citing a low valuation.

“We’re very defensive,” Mr. Takacsy said. “It is better to be a little too early than too late.”

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Alkarim Jiwa, portfolio manager at Gluskin Sheff (and, fittingly, a colleague of Mr. Rosenberg), doesn’t feel that a recession is imminent. But he recognizes that volatility is normal and there are ways that investors can prepare for market downturns.

He pointed to several mostly large-cap opportunities within four defensive sectors.

Within utilities, Emera Inc. stands out as an ideal holding: It is a regulated electric utility with operations in Canada, the United States and the Caribbean. The stock is down nearly 10 per cent this year and yields 5.3 per cent. Hydro One Ltd. (full disclosure: I own this stock) and Fortis Inc. are also fine opportunities, he believes.

Within the telecommunications sector, BCE Inc. and Telus Corp. are good choices and virtually bullet-proof given our reliance on cellphones and home internet. They yield 5.5 per cent and 4.4 per cent, respectively. Mr. Jiwa noted these Canadian companies have significantly less leverage than their U.S. counterparts.

Among health-care stocks, he likes companies that provide retirement services: Chartwell Retirement Residences, which yields 3.9 per cent, and Sienna Senior Living (a match with one of Mr. Takacsy’s picks).

“These are great businesses that provide an essential service and have the tailwind of demographics working in their favour. Seniors generally do not give up their spot in a retirement home during a recession,” Mr. Jiwa said in an e-mail.

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And lastly, he pointed to essential consumer staples: Grocery stores and drug stores. Following a recent round of consolidation, investors can now get both types of stores by buying either Loblaw Cos. Ltd. (which owns Shoppers Drug Mart) or Metro Inc. (which owns Jean Coutu).

Mr. Jiwa agrees that many of these defensive stocks are particularly attractive today because rising interest rates have hammered share prices.

“In a recessionary environment, interest rates will decline. These securities will stand to benefit from both their defensive properties and interest-rate sensitivity,” he said.

He added: “If you are worried about the late cycle and next recession, there isn’t a better time to prepare than right now.”

Tickers mentioned in this story

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